A law change on 1 April means that KiwiSaver providers must now disclose their policy on ethical investment. Of course, for a fund manager, having to disclose your policy doesn't imply that your investment funds have to be ethical. It just means that KiwiSaver investors can see more clearly which funds are ethical and which are not. With the recent launch of ASB's Global Sustainability KiwiSaver Fund there are now two ethical KiwiSaver funds to choose from; the other being Asteron's Socially Responsible Investment Share Fund.

One of the problems with ethical investing is that the term ethical means different things to different people. The investment statement for the ASB Global Sustainability Fund, which invests in global shares, states that 'The fund invests in companies that demonstrate sustainable practices and policies, recognising that environmental, social and/or governance factors can impact a company's long term performance'. This wide definition is not particularly useful. The Asteron Socially Responsible Investment Share Fund's approach to ethical investing is to exclude 'companies that are principally involved in the tobacco, alcohol, armaments and gambling industries'. This fund invests primarily in New Zealand companies and to a lesser extent in Australian companies. As a KiwiSaver investor interested in ethical investing, should you invest in one of these funds? And if so, which one?

The Asteron fund is a good example of what is called a negatively screened fund - that is, it excludes investments that are by its definition 'unethical'. It's a simple investment philosophy that would exclude only a small minority of companies involved in specific 'immoral' activities. There is nothing about this investment philosophy, however, that would result in exclusion of companies that have a detrimental effect on the environment, such as, for example, a nuclear power plant or a mining company. The ASB fund, on the other hand, appears to have what is referred to as a positive screen - that is, it seeks out for investment those companies who have a positive effect on the environment through sustainable practices and policies. This is likely to mean there is a narrower choice of investment possibilities, although this will depend on how the broadly stated policy is implemented.

Before you decide if you should invest in one of these funds, you will need to decide whether either of these approaches is a good match for your own personal beliefs about what is ethical. Another consideration is how diversified you want your investment to be. Investing only in the Asteron Socially Responsible Investment Share Fund will mean that all your investment will be in Australasian shares, while with the ASB Global Sustainability Share Fund, all your investment will be in global shares. Asteron and ASB offer other funds within their KiwiSaver range, so you can diversify your investment by spreading your contributions across other available funds in the same range, although they may not be ethical funds. Remember - don't have all your eggs in one basket. As far as fund returns are concerned, there is no reason why the returns on these funds should be any different from other share funds. How well they do will depend on a combination of market forces and the skill of the manager.

Article by Liz Koh, author of the book Your Money Personality; Unlock the Secret to a Rich and Happy Life, Awa Press, March 2008

Liz Koh is a financial adviser. Her disclosure statement can be obtained free of charge by calling 0800 273 847. 

Ph: 0800 273 847

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